Home warranties: not what you imagined

It comes as a shock to many homeowners – their pipes burst in the dead of winter, resulting in an expensive repair bill. After getting on the phone with their insurer, they get terrible news – homeowners insurance doesn’t cover maintenance issues.

This gap in coverage leaves property owners with two choices – save up a reserve fund for household repairs or sign a home warranty contract. For the 40% of Americans who can’t cover a $400 emergency, the latter option is a lifesaver. On the surface, home warranty companies charge reasonable premiums that fit in well with their household budgets.

However, a lack of regulation in the home warranty industry has led to consumer abuse. In this piece, we’ll expose the dark side of this business and discuss what needs to be done to restore confidence in the sector.

What is a home warranty?

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If you have always saved up money to deal with repairs, you may not know what a home warranty is. They closely resemble homeowners insurance – instead of covering catastrophic damage caused by fires, storms, or vandalism, they pay for appliance and system repairs.

It is impossible to know when your stove will stop working. This is a major selling point used by home warranty companies – by replacing sudden, massive home repair bills with a predictable monthly payment, you’re less likely to find yourself in a financial crunch when something breaks.

What are the downsides of home warranties?

For all their benefits, though, home warranties definitely have their downsides. No matter whether you have paid into your plan for years or have problems months after signing up, you’ll have to pay a service fee, or a deductible, to get anything fixed.

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This fee can range anywhere between $60 to $125 per call. If the repair job is substandard and the appliance/system breaks again a few months later, that’s another $60-$125 that you might have to pay.

It gets worse – if you have an expensive repair, like a busted central air unit, the home warranty company might not cover the entire bill. Most home warranty companies have caps on coverage – any expenses past a specific dollar amount (e.g. $3,000 in the case of American Home Shield) is the responsibility of the policy holder.

Finally, you might not even need a home warranty. If your house is newly built and filled with recently bought appliances, it is unlikely anything will go wrong in the short term. Similarly, if you are skilled at home repair or have a home maintenance reserve fund, a home warranty will take away $20-$50 per month that could be budgeted elsewhere.

A lack of regulation has led to bad corporate behavior

Despite having a similar business model as homeowners insurance, home warranties are loosely regulated. Unlike the former industry, home warranty companies aren’t constrained by state regulators. Aside from complying with a handful of state laws governing their behavior, they are free to do business however they see fit.

This has resulted in a long list of consumer complaints. From being opaque about reimbursement rates to dispatching unqualified repairpersons, the lack of rules has sullied the reputation of the industry.

Reddit user 1010qpqp thought their first home warranty claim was going well. Home Warranty of America (HWA) couldn’t find an air conditioning technician in their area, so they had been told to find one and submit an invoice.

They did so and got a call from HWA a few days later. Of the $550 in covered charges, they said they would only reimburse $120. Why? Because that was their cap for air conditioner repairs, according to rates they refuse to disclose.

Poor customer service is another common complaint. Just ask Sabra from Kansas City, Missouri – according to a review left on ConsumerAffairs.com, she called Old Republic to have her furnace fixed after it broke in the middle of the night.

Sabra has a newborn baby – therefore, not having heat posed a serious health risk. Despite this, agents dispatched a contractor that didn’t provide emergency service – this meant Sabra and her baby might be without heat for 24 hours or longer. She suggested contacting a local company that could, but was cut off by the customer service rep. After her fifth call of the morning, she reached a local company and paid for the repair out of pocket.

When repair personnel are dispatched to addresses with home warranties, work is often substandard, if it is performed at all. In a post on home warranty horror stories on Clark.com, ‘Jerry C’ describes an encounter with a contractor that lasted all of two minutes.

Despite providing a detailed description of his furnace, the repairperson quickly concluded he couldn’t work on it. Jerry still had to pay the service fee, despite the fact no work was performed.

And yet, it doesn’t seem to matter

It is clear home warranty companies are their own worst enemy. Yet, the industry continues to grow – according to market research firm IBISWorld, revenue has risen by 3.3% over the past five years.

Some of the bigger home warranty companies have even gone public. American Home Shield’s parent company, Frontdoor Inc, now trades on the NASDAQ under the symbol FTDR. Another of these companies is a household name: Sears.

Unlike its retail division, which is currently going through Chapter 11 bankruptcy, their home warranty division is thriving. While revenue figures for Sears Home Services are obscured in the overall number for Sears Holdings, the fact they are actively hiring technicians while stores are closing nationwide shows the strength of the home warranty industry.

How can we rein in the home warranty industry?

Despite all the demand for their services, reading just one First American Home Warranty review drives home a central point – the industry has serious customer service problems. What can be done about this? The free market has had ample opportunity to fix this issue – despite years of bad press, no major players are competing on customer service.

The time has come for an organization that promotes effective regulation in the same way the National Association of Insurance Commissioners does for insurance companies. Supported by all 50 states, this body is a think tank used by state regulators to draft laws in their own jurisdictions.

A similar body targeted at the home warranty industry would help legislators across America draft laws that would create transparency and protect consumers from malpractice.

Home warranty companies have gotten away with abhorrent business practices for years – it’s time government stepped in to protect consumers. By doing so, the industry’s reputation will improve, making it a positive development financially for these companies over the long term.